James Follows, Head of UK Equities
Next is a staple of the UK high street, but it is a brand that only came into existence in 1982. The group started life as a store chain called Hepworth and it morphed into Next after the group's Chairman, Terence Conran, recruited a former footballer called George Davies to take it in a new direction. George seemed like an unlikely recruit: he went from scoring for England in an Under 18 match against Scotland, to studying Dentistry at University, before cutting his teeth as a fashion buyer at Littlewoods. Nevertheless, he proved to be a good designer and the new chain flourished. In 1987, Next expanded aggressively by acquiring a business called Combined English Stores. In addition to Next wanting their shops, the purchase also gave Next ownership of the Grattan home shopping catalogue, which subsequently became the well-known Next Directory. The expertise that gave them in home delivery paved the way for Next.co.uk, and revenues generated via the online offering are now bigger than sales from the high street stores.
On a global basis, E-commerce is not quite as dominant as one might suspect (over 20% of total retail sales in China according to Euromonitor data but less than 10% of total sales in countries such as France and Brazil), but with this year's Black Friday bargains luring more consumers online, E-Commerce seems set to grow for many years to come. New businesses are surfing this wave, and with a web page now serving as a shop window, and a scalable, multilingual, multi-currency, retail platform, it is not unusual to find brands like ASOS and BooHoo.com that have no high street presence at all.
This is creating challenges, change, and opportunities. Formerly dominant US retailers like Sears and Toys R Us have filed for bankruptcy. Similarly, this side of the pond, recent headlines have highlighted the closure of stores as diverse as House of Fraser and Evans Cycles. Some entrepreneurs are responding to the challenge (the former BHS store on Oxford Street is now home to an indoor golf establishment called Swingers where caddies will bring you drinks from the bar), but for the average UK high street there are more questions than answers at this point, making UK investors very wary of retail property.
Some groups are sticking with their store-based business model. Primark, for example, has recognised that its low-priced offering is not compatible with delivery costs and the expense of processing returns. It has spread successfully in Europe and is now quietly pushing ahead with store openings in America. At the other end of the price spectrum, luxury groups like LVMH and Burberry have a hybrid approach. Stores in prestige locations are used to represent the brand; social media is used to spread the story; and the online offering is used to drive sales. Three names have dominated searches in the luxury space in recent quarters - Gucci, Off-White and Balenciaga. Two of those groups are venerable names, where new designers are creating a new buzz. Whereas Off-White is a high-end streetwear brand that was only founded in 2013. The designer behind the brand is an American called Virgil Abloh, and without the power of the internet, it is debatable that he could have risen to prominence as quickly as he has.
The rise in online shopping is producing lots of change, but the history of Next is a reminder that nothing ever stays the same. Earlier this year, LVMH sharpened their competitive edge by appointing Virgil Abloh as the artistic director of their Louis Vuitton ready to wear menswear line. Change can mean uncertainty, but by being alert to new developments, investors can separate the winners from the losers.